Updated: Jan 26
The stock-market is more than just a game of simple luck. It has been a wish-granting factory to many. While people like Warren Buffett & Rakesh Jhunjhunwala made a billion-dollar fortune out of it, for others it was nothing more than just a terrible nightmare. But there are also some people who went beyond the rules and regulations to manipulate the market and pocket crores. One of the most famous scams was the 1992 scam of Harshad Mehta.
Like every rags to riches story, Harshad Mehta (The Big Bull) came to Mumbai with only Rs. 40 in his pocket. He soon discovered his passion for the stock markets and started working as a stockbroker before launching his own broking firm, ‘GrowMore Research and Asset Management’ in 1984. Harshad Mehta discovered loopholes in the Indian banking and security system, which made him the king of Indian stock markets. With these loopholes Mehta allegedly committed a fraud of over Rs. 5,000 crores.
But the story didn’t end there, soon there was another player how took the place of the Big Bull.
It was non-other than a mentee of Harshad Mehta, Ketan Parekh famously known as a ‘Bombay Bull’ during 1999-2000. Ketan Parekh spearheaded the second biggest scam in the Indian stock markets. Just like Mehta, Ketan Parekh was the God for many investors as he created a delusion that whatever he touched turned into the Gold and whatever he wished the market seemed to grant him. During his peak, marketmen literally followed his every move blindly as he used to exploit the stock prices to gain the trust of these investors.
Ketan Parekh used Kolkata stock exchange to trade as this was the stock exchange with no strict and pivotal rules & regulations. He also tied up with some brokers to trade on his behalf and gave the commission. With this amount he would buy some less known company’s shares (20-30 %) to skyrocket the price and make them the talk of the town. Once the share prices hit a certain level, he would silently exit and sell the securities and make huge profits.
Once he gained the name in the market, he created a portfolio called K-10 which consists of top 10 hit picks by Ketan Parekh himself. He inflated the price of the stocks under K-10 portfolio (e.g., HFCL from Rs. 42/share to Rs. 2,300/share and Global Teleservices from Rs. 85/share to Rs. 3,100/share). He would then keep his inflated stocks with banks as collateral and get more loans. Although RBI kept a cap on loan limit with 15 crores, he borrowed 800 crores from the MMCB (Madhavpura Mercantile Co-op Bank) and Rs. 100 crores from the GTB (Global Trust Bank) without any collateral by bribing the bank officials. Even the promoters of these K-10 companies paid him to inflate their stock prices.
He then used this money to inflate the stock prices by doing circular trading i.e., trading among select operators only. This created an excess free float in the stock. Retail investors got lured into the stocks due to the excess liquidity. But when the DotCom bubble burst all the K-10 stocks witnessed massive fall in the stock prices and as a result the MMCB bank and GTB banks were close to being bankrupt. As the banks were unable to repay their customers, RBI called an enquiry which unearthed the fraud.
Even learning from the best con artist (Harshad Mehta) of Indian stock market and taking all necessary precautions, could not save Ketan Parekh. He was arrested on March 2000. He was banned from stock market trading for 15 years.
To sum up Ketan Parekh scam allegations, he was found involved in cheating with banks by misrepresenting facts, falsifying accounts, ripping-off the stock market prices and exploiting investors’ decisions, mishandling public money, bribing company directors to enable him to do insider trading.
The scam was estimated to be around Rs. 40,000 Crores.
Clearly the student surpassed the master.
A big thank you to this lady journalist Padma Shri Sucheta Dalal, who exposed the biggest scam in the history of Indian Stock Market (The Harshad Mehta Scam 1992) on 23rd April 1992 in the columns of Times of India. Due to the excellent work in journalism, Sucheta Dalal was awarded a Padma Shri for journalism in 2006.
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